Strategy Facing Class Action Lawsuit Over Bitcoin Accounting Changes

Alongside its recent buying update (acquiring 7390 Bitcoin, over AU$118B), Strategy revealed that it is now facing a class action lawsuit

MicroStrategy is being sued by an investor who claims the company and its executives misled investors and failed to disclose key risks.

What Happened: An investor named Harry Kane filed a class action lawsuit on May 16 in the US District Court for the Eastern District of Virginia, alleging that MicroStrategy (NASDAQ:MSTR) and its executives engaged in fraudulent conduct.

The lawsuit, which seeks to recover damages for investors who purchased MicroStrategy securities between February 25, 2023, and March 15, 2023, also alleges that the company failed to disclose the true nature of an upcoming change in accounting rules for cryptocurrencies.

The complaint focuses on MicroStrategy’s January adoption of fair-value accounting for its Bitcoin (BTC) holdings, an industry-wide change that was approved by the Financial Accounting Standards Board (FASB) last year.

Instead of the previous model, which treated Bitcoin as an intangible asset and only required impairment charges on declines, fair-value accounting requires firms to mark their holdings to market each quarter, including both gains and losses.

MicroStrategy had backed the shift, saying in a letter to investors that it “would enable us to provide investors with a more relevant view of our financial position and the economic value of our bitcoin holdings.”

However, the lawsuit claims that MicroStrategy and its executives downplayed the significance of the upcoming accounting change and its potential to increase the volatility of MicroStrategy’s earnings and share price.

The lawsuit adds that MicroStrategy’s executives continued to tout a self-defined metric called “BTC Yield,” which measures the rate at which MicroStrategy is accumulating new Bitcoin shares relative to its outstanding shares.

But according to the lawsuit, this metric was becoming increasingly difficult for MicroStrategy to maintain at a time when it was preparing to disclose largely diminished earnings.

In early April, MicroStrategy warned that it wasn’t expecting a profitable first quarter, and that it was preparing for a paper loss of nearly $6 billion in its Bitcoin holdings. A few weeks later, MicroStrategy reported an actual net loss of $4.22 billion, or $16.49 per share.

Lawsuit Details: The lawsuit names several MicroStrategy executives as defendants, including Chairman and CEO Michael Saylor, and CFO Amy Lee.

It also alleges that MicroStrategy failed to disclose a new risk factor that was approved by the SEC in January 2023.

The lawsuit is still in its early stages, and it remains to be seen how it will play out.

It is important to note that the lawsuit allegations are just that, allegations. The defendants have not yet filed their responses to the complaint.

Earlier this month, Avenir Group Ltd disclosed that it now holds the largest positions in both the iShares Global Clean Energy ETF (NYSE:ICLN) and the Bittrex (CRYPTO:BTREX) token among Asia’s biggest ETF and crypto firms.

According to the firm’s latest report, its ICLN holding is valued at $686 million, making it the biggest named ETF position among the 10 largest firms in the region, based on the firms’ own figures in their latest reports.

Its BTREX token position is valued at $148 million, making it the biggest crypto holding among the 10 largest firms in Asia.